Better returns for super fund

The government’s pre-funded superannuation scheme now looks set to make a better net return than officials expected six months ago.

Wednesday, December 19th 2001, 7:03AM

by Rob Hosking

Yesterday’s December Economic and Fiscal Update, released by the Treasury, shows that the expected return on the fund, after tax, has risen form 6% to 7.52%.

The reason lies not in a more optimistic view of the likely revenue from the funds invested, rather, Treasury officials have adjusted the estimate of how much tax the fund will pay.

It is now expected the fund will pay less tax than was assumed at the time of the 2001 Budget.

The assumption made then was that the fund would pay 33% tax, and the likely net return was calculated on that basis.

However the likely mix of the fund, at this stage assumed to be 70% in equities and 30% in bonds, means it is unlikely the fund will pay this much tax.

Capital gains on equities, particularly those held as passive investments, will attract much less tax than bonds.

A 20% rate has been assumed "well within the bounds of reasonable forecasting accuracy three to four years ahead" according to the economic statement.

The adjustment is not the only change in assumptions since the Budget. Management fees which were not assessed six months ago are now estimated at 0.3%, and the equity premium is assumed to be 5%.

The changes are highly unlikely to result in the government putting more money into the fund, rather they will allow it to lower the contributions and use that money to scratch more immediate political itches.

The fund will have a further $600 million put into it in mid 2002, the same amount as this year. That is actually a lower amount than is required if it is to meet its aims. That would require $1.573 billion 2002.

The government is slowly upping the amount from 2003, and will meet the actual requirement in 2005. The gradual phase in will "prevent undue pressure being placed on the fiscal position while structural surpluses are raised to the required levels," the statement says.

The adjustment to the tax assumptions will give governments of the future some further head room in meeting this target.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.